Outsourcing of Professional Services: Technical, Economic, Organizational, and Strategic Aspects

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Outsourcing of Professional Services Technical,
Economic, Organizational, and Strategic Aspects
University of Arizona Spring 2007
Professor Amar Gupta Tom Brown Chair and Senior
Director for Research and Bus. Development Eller
College of Management Tucson, AZ 85721 USA
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History of Evolution

• The Kodak Effect 1989 To IBM, DEC,
  Businessland

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History of Outsourcing

• Earlier in 1963, EDS took over EDP department of
  Blue Cross of Pennsylvania
• EDS took equity position in System One of
  Continental Airlines
• EDS purchased by GM in early 80s and spun-off
  again
• 10 of outsourcing revenue must be ploughed back
  into South Australias economic growth!

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Other Significant Developments

• Y2K and EEC
• Policies of governments in emerging economies
• Policies of governments in developed economies

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Outsourcing in Automobile Industry

• Ford Motor Company in 1900s
• Import of Parts from other locations/countries
• Markets versus Manufacturing Locations
• Transition back to the US!

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Outsourcing in Other Industries

• Optics Industry
• Steel Industry
• Impact of Disruptive Technologies

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• Economic Issues
• Analysis of Individual Companies
• Analysis of Industry Sectors
• Analysis of Individual State/Local Governments
• (Case of Indiana vs. Springfield)
• Net Impact to Individual
• Loss of Job vs. Benefits as Consumer, Taxpayer,
  Shareholder

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Indiana Example

• Summer of 2003 Tata America Int. Corp,
  Accenture, and Deloitte Consulting make bids
  ranging between 15.2 million and 38.5
  million. No Indiana-based company submitted bid.
  Up to 65 contract workers were envisaged to work
  alongside 18 state workers.
• September 2003 Governor Frank OBannon accepts
  lowest bid.
• November 2003 Governor Joe Kernan cancels
  contract.
• Decision NOT related to shortcoming of any type.
• Projected Difference 8.1 million versus
  approximately 50 employees.
• Decision of Voters in 2004!!

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Springfield Example

• Cost of Drugs Lower Abroad typically one-fifth
  to one-half
• Better Services for Residents of City and/or
  Lower taxes
• Model accepted at State Level
• California has adopted slightly different model
  CGI etc.
• Practices Vary Widely.

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Productivity Issues

• 1 Person
• 10 Persons Co-located
• 10 Persons Distributed
• 10 Persons Distributed

• 1
• 10 X F
• 10 X f
• 10 X f / R

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Distance Tax

• Communications
• Travel
• Maintenance of Duplicate Facilities
• Cultural
• ..

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Medical Transcription Services

• Extended Learning Curve- Eight to Twelve Month
  Training Program
• Cost US 2500 to 3000/mo versus Indian MT lt
  300/mo
• Education All have at least undergraduate
  degrees
• 221 science/medical-based degrees
• 37 doctors
• 17 pharmacists
• Cultural Bagels and Beagles and other cultural
  differences

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Results of Major Studies

• 1 spent abroad leads to 1.45-1.47 of value
• Of this, foreign firm receives only 33 cents
• US company receives between much more
• Aggregate benefit to US economy of 16.8 billion
  from one sector alone.

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Overall Numbers

• Number of US companies
• Number of Jobs Relative to Overall Size in India
• Percentage of Global Market

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Outsourcing in Other Areas

• Legal P G
• Accounting
• RD
• Teaching My job can be outsourced!
• British Rail
• Italian Passports

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Question for Break

• Think of other examples of outsourcing
• Think of older examples of outsourcing

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• Organizational Issues
• Intra-organizational, Inter-organizational, or
  Partnership
• Degree of Coupling
• Intellectual Property Issues possibility of
  taxing IP exports/imports

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Creation of New Terms and Models

• Outsourcing
• Offshoring
• Globalization
• Near-shoring
• In-sourcing
• Multi-sourcing
• Co-sourcing

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One Consulting Companys View
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Decision Variables

• Magnitude of Project
• Complexity of Effort
• Criticality of Endeavor
• Duration and Potential Repeatability
• Degree of Need for Scalability
• Cost Considerations
• Preference for Host Environments Social,
  Economic, Political, Skill-Level, Language

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Potential Locations
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Evaluating Potential for Offshoring

• Temporal and Spatial Considerations
• Balance between Automation and Labor
• Degree of Proximity Needed with Suppliers,
  Co-Contractors, and Buyers
• Time zone differences (Earlier a bug now a
  feature)
• Degree of Need for Specialized Expertise
• Trans-border Data Restrictions
• Immigration and other Cross-border Restrictions
  (H1B, L1 visas security considerations)

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• Value Addition Models
• By understanding the offshore teams role in
  value addition, firms can plan their models
  accordingly. Also, as costs get higher, offshore
  teams can also move up the learning curve to
  higher value jobs.
• Low-end
• Mid-range
• High-end
• For the nation, the important issue is not where
  companies are based, but where value addition is
  based.

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Delivery Models

• Captive center
• Joint venture
• Third party
• Many interrelated issues make different models
  right for different firms. For example,
  third-party ventures may allow firms to avoid PR
  issues of using child labor, or local corruption
  practices

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Key Motivators

• Cost
• Skill Levels
• Time to Enter Market
• Economies of Scale
• Local Market Needs
• Opportunity to Concentrate on Bigger Issues

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Key Hurdles

• Lack of Management Support
• Resistance from Employees
• Difficulty in Negotiating Contracts
• Difficulty in Finding Reliable Partners
• Potential Risk to Intellectual Property
• Political or Governmental Interference

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Partnership Models

• Resource Based
• Offshore/Nearshore Development Center
• Build, Operate, and Transfer
• Joint Ventures
• ..

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Decision-making dependencies for individual work
3 scenarios
(a) Autonomous
(b) Semi-Autonomous
(c) Heavily-interdependent
- Three scenarios for decision making - This
really is a continuous scale, based on how
interdependent the tasks are Examples -
Autonomous call center - Semi-autonomous
hierarchy of experts (tv repair, etc) -
Heavily-interdependent software development -
Important thing is to assess the knowledge
interdependencies first, for two reasons 1) know
how to setup outsourcing structure for existing
operations 2) determine if new knowledge
dependencies can be made, leading to new
organizations
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Organizational models for heavily-interdependent
teams
(a) Flat Organization
(b) Geography-specific
(c) Task-specific
Organizational models for heavily-interdependent
decision making teams. By addressing the
heavily-interdependent scenario, one can deal
with the complexities of relatively simpler
scenarios. Another axis to consider while
considering appropriate decision support systems
is the nature of the organization. In a flat
organization, all decision-makers, regardless of
task or geography, can be deemed to belong to a
single organization. In other cases, additional
layers of hierarchy exist within the overall
organization. Based on the degree of importance
played by the geography or the task, one can
visualize the three cases depicted in figure 3,
to filter decision making input and output
through either the geography or task group.
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Example Organizations/Projects

• IBM PC
• Polaroid
• Novartis

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• Strategic Issues
• Roles of Government Agencies when to
  encourage/discourage?
• Evolution of Enclaves infrastructure,
  training, security
• Growing Digital Divide political risk of
  have-nots in unstable countries

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• Technical Issues
• 24-Hour Knowledge Factory
• Automated Translations on a real-time basis to
  open outsourcing to non-English markets
• Surmounting Differences in Accents and Tones of
  Voice
• Transformations and Mediations meaning of
  rear-ended
• Wireless Grids (Wirelessgrids.net) - open rural
  areas to outsourcing

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24-Hour Global Knowledge Factory
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Knowledge Acquisition

• Involves acquiring information from human beings,
  paper based documents, sensors, and other
  traditional media
• May need to be done on a one time basis, periodic
  basis, or continuous basis
• Driven by society, organization, or application

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Two concurrent approaches to knowledge-based
design

• MATE
• Fully integrate all stakeholders into design
  process in an efficient and user-friendly manner
• Collect and process expense and utility data
  using virtual methods

• SSPARCy
• Examine relation between changing expense and
  utility functions and design parameters
• Provide designers with more concrete method of
  expressing design rationale

• Result
• Efficient communication across multiple
  locations
• Innovative ways of collecting,
  processing,presenting and interpreting design
  information

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Dynamic Web-based Interface for Knowledge
Acquisition
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Decision Rationale Module
Decision Archival Module
Decision Rationale
Attribute Definition
Decision Parameters
Utility Interview
Utility Function
Utility Measures
Attribute Values
Architecture Diagram for KNOWFACT
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Trusted Agents

• Can access all the information from multiple
  databases held by participating organizations.
• Will provide only subsets of information to other
  organizations on a need-to-know basis.
• Can be used to access data that one finds hard to
  reach, such as the Medicorp data that the
  research group utilized.
• Will play increasingly valuable role in
• interorganizational data flows.

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Knowledge Management
Bottleneck
Sources
Receivers
S1
R1
Pesetas
French francs
S2
R2
US
Sm
Rn
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Knowledge Discovery

• Human beings are good at visualizing in 2 or 3
  dimensions
• Neural networks can perform good visualization in
  more dimensions
• Peaks and valleys predicted with good learning
  ability, when signal to noise ratio is above a
  particular threshold

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Neural Network Based Approaches

• Neural Networks mimic the broad parallelism that
  characterizes the human brain
• Ideal for detecting trends that even human
  experts may find very difficult to identify
• In the case of Medicorp data, neural network
  data mining techniques could reduce inventory
  levels from 1 billion dollars to 500 million
  dollars.
• Neural Network based data mining techniques
  appear
• ideally suited for large data-analysis oriented
  applications
• 50 reduction in carrying costs while leaving
• operational readiness level unchanged!!!

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Wireless Grids Virtual Organizations

• Three aspects to consider when defining possible
  virtual organizations
• Grid Computing Services versus Wireless Grid
  Services
• Wireless phones versus Wireless Grids
• What isnt being done right now.

Grid Computing Technology
Wireless Technology
Wireless Grid Services
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Grids for Virtual Organizations
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Virtual Enterprises?

• The Virtual Enterprise is a network of several
  companies, which contribute their core
  competences and share resources such as
  information, knowledge, and even market access in
  order to exploit fast-changing market
  opportunities. The relationship can be long or
  short term.
• Virtual Enterprise Computing Grid Computing

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Design Challenges for Virtual Enterprises

• Decentralized Control
• Accounting
• Preference Specification (Service Discrimination)
• Ease of Use
• Security
• Heterogeneity
• Cost vs. Performance
• Low Overhead
• Complementary Resource